CHILE: Itaú Expects July Rate Cut, Barring Escalation In Global Tensions

Option desks report better SOFR two-way outs on net this morning, Treasury options seeing some decent vol structures leaning towards sales so far. Underlying futures mixed, curves steeper with short end leading bounce off morning lows. Projected rate cut pricing holds steady to cooler in longer dates vs. late Monday levels (*) as follows: Jun'25 at -1.3bp (-2.1bp), Jul'25 at -7.5bp (-8.9bp), Sep'25 at -21.8bp (-24.6bp), Oct'25 at -35.5bp (-36.4bp), Dec'25 at -53bp (-53.5bp).

• SOFR Options:
  • 8,000 SFRZ5 96.50 call vs. 2QZ5 96.75 calls, 5-5.25 flattener (+2QZ5)
  • +10,000 SFRU5 95.75/95.81 put spds, 3.75 vs. 95.90/0.10%
  • -5,000 0QU5 96.87/97.00/97.12 call trees, 7.0 vs. 96.00/0.19%
  • -2,500 3QM5 95.87/96.12 2x1 put spds, 1.5 ref 96.33
  • +4,000 SFRM5 95.68/95.75 put spds, 5.5 ref 95.6825
  • +5,000 SFRU5 95.87 vs. 0QU5 96.25 put spds, 1.25
  • 5,000 SFRN5 95.62 puts, 0.5
  • 4,000 SFRH6 94.75 puts, ref 96.42
  • Block, 5,000 SFRM5 95.62/95.75/95.87 put flys, ref 95.69
  • 3,600 SFRM5 95.68/95.75 put spds ref 95.6925 to -.69
• Treasury Options:
  • -7,800 TYN5 110 straddles 1-41 ref 110-03.5
  • -11,000 TYM5 110.25/111.5 put spds 1-05
  • +9,000 TYQ5 108/112.5 strangle, 59
  • Block, +17,000 TYQ5 113 call w/ 17,500 TYQ5 107.5 puts, 47 total vs. 110-05
  • 2,400 TYN5 114/114.5 call spds ref 110-14

Eurozone excess liquidity declined by E16.6bln during the w/c May 12, bringing the measure down to E2.76tln as of last Friday. This means compared to its high of E4.75trn in November 2022, liquidity in the Eurozone banking system declined by around 42%.

• The decline since then has mostly been driven by a roll-off of the ECB's TLTROs (with the TLTRO III programme starting in 2019 with three-year maturities and with the final maturity in Dec 2024) as well as of the ECB's Monetary Policy Positions (MPPs), which are standing at a current E4.05tln combined. Amongst the MPPs, the ECB envisages a further average monthly rolloff of E13.6bln of the PEPP through Dec-26 and of E28.4bln of the APP through Jul-26 (respective f'cast horizons).
• ECB's Schnabel saw back in March that the "European banking system is currently operating with a high level of excess liquidity", and, fairly generally, that "Over the coming years, the reduction of the Eurosystem monetary policy portfolios will further lower the amount of excess liquidity available to banks in the euro area."
• UniCredit commented last week, finding that "excess liquidity is still well above its equilibrium level. ECB disinvestments may have to continue beyond the end of 2026 before pressure on money market rates start to show up".

Phase of bond sales in both Europe and the US starting to be felt in dollar markets - despite initial resilience to the steepening bias for the US curve. EUR/USD is back toward the upper-end of the day's range, but resistance layered between 1.1278-88 stands ahead of any bullish breakout.

• GBP looks through headlines that the UK are freezing free trade deal negotiations with Israel, with GBP/USD now over 30 pips off lows. We noted earlier today that the pair struggles to maintain gains above the $1.34 handle - a level that will remain in focus headed into tomorrow's inflation print - a number we see as particularly consequential for UK monetary policy this year.
• GBP/AUD's RBA tripped gains see the cross hit new daily highs, with prices still some way off more major resistance into the 2.1030 late April high.